No one wants to see too big to fail JP Morgan (JPM) go belly up like Lehman Brothers did. In fact, the Senate simply won't allow it. They'd lose too much in campaign donations.
JP Morgan's recent $2 billion loss on a wild product it created -- an index of European credit default swaps (CDS)-- might as well be tax payer money.
"JP Morgan is the new Fannie Mae," says Bill Black, an economist from the University of Missouri and author of the book "The Best Way To Rob A Bank Is To Own One".
Fannie Mae is a subsidized mortgage lender, backed by the full faith and credit of Uncle Sam. If Fannie Mae's sub prime lending portfolio blows up, as it did in 2008, the federal government picks up the tab. The federal government has done the same with JP Morgan and the remaining bulge bracket banks. They are thriving, in part, on the very real belief that what they do is risk less. They are profitable because, to a large extent, then can buy Treasury bonds at a discount and sell them to the Fed at a premium. They are the too big to fail king pins of U.S. domestic policy. And if they do fail, the government will pick up the tab. At the very least, it will help them by offering them money at near zero percent interest to gamble in the markets.
JP Morgan CEO Jaime Dimon testified before the Senate Banking Committee on Wednesday about the recent trading losses. During the testimony, he came out sharply against regulating derivatives and putting "speed limits" on derivatives trading under the so-called Volcker rule.
So far, Dimon's world view is winning. But this trading loss could ultimately force regulators' hands to do something in the trillion dollar derivatives market in order to avoid future bailouts.
Very few people in Washington, including Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner, will allow for big banks to go bust because of their overall impact on society. Banks got bigger in 2008 by acquiring the assets of other banks while the government took over much of the toxic loans. Now there are fewer banks controlling even more of the U.S. economy. In a crisis like this one, multiple institutions are all fragile at the same time. So the fear of the regulator is that if you knock one down you bring a whole cascade of smaller banks down with them. The Lehman Brothers/Bear Stearns episode showed that. Best to just keep subsidizing them. But the government has very little money to continue doing that, and the public no longer has any patience for it.
Meanwhile, in an economy where there is very little revenue from traditional investment banking sources -- mergers, acquisitions, new bond issues, IPOs and secondary offerings -- the big banks turn to derivatives to make triple digit gains. Many of these derivative products, from traditional options contracts to the collateralized mortgage obligations, or CMOs, that haunted and busted many firms in 2008, are big money makers for the banks. They work, until they don't, as was the case with Lehman, Bear Stearns, Merrill Lynch, Washington Mutual to Bankers' Trust way back in 1998.
"No one knows if it is two billion or more that JP Morgan lost in this trade. You cant identify the loss total, even remotely," says Robert Johnson, a former managing director at Soros Fund Management and chief economist for the U.S. Senate Banking Committee. He currently is director of the Global Finance Project for the Franklin and Eleanor Roosevelt Institute in New York.
JP Morgan still has not fully unwound its CDS' positions.
"I would imagine given the size of the bank that over the next quarter they will evoke a tremendous amount of accounting ingenuity to try and create offsets, create derivatives to bring revenue forward and look profitable," Johnson says. "I'm sure there are pockets in the bank that will be used to offset these losses in the next couple of quarters to help Dimon reassert his control of the situation."
For some, Dimon already is in control.
The Senate panel questioning Dimon on Wednesday was flooded with political contributions from JP Morgan and other banks, the New York Post noted on its cover today.
Of the 22 members on the congressional panel, seven members, including the Chairman and a ranking member, have JP Morgan as one of their top five political contributors. Tim Johnson, the Senate Banking Committee chairman, had JP Morgan as his single largest contributor from 2005-2010. Six other members on the committee also received large bonus checks from JP Morgan, totaling $351,582 from 2007-2012. From 2007-2012, members of the Senate Banking Committee received in total over $13 million from the financial services industry. The American Banker reported Wednesday that the ties between Wall Street and the Senate Banking Committee go even deeper. The top aide to chairman Johnson, Dwight Fettig, is a former anti-Volcker lobbyist at Porterfield & Lowenthal, a firm that did work for JP Morgan in 2009 and 2010. Former Johnson aide, Naomi Camper, is now one of JP Morgan’s chief lobbyists.
The Senate basically asked Dimon, "how may we help you?"
"We are dealing with seriously leveraged entities with a lot of government subsidy. It's all our money," says Black. "Today's testimony was an unbelievable conflict of interest and both parties think this is as sweet as nectar."
